Credit: Shutterstock photoNetflix (NFLX) is one of the more volatile names going into earnings, but based on strong expected first quarter results and the company's scale, shares may offer investors significant upside.
Pacific Crest Securities analyst Andy Hargreaves believes investors should buy the stock going into the first quarter. "Netflix's scale, efficient content purchasing and ability to program content without the restrictions of time provide structural advantages that should support massive global revenue and profit growth in the coming years, in our view," Hargreaves wrote in a note.
He rates shares outperform with a $500 price target.
Streaming services have garnered a lot of attention recently. HBO recently launched its own service, HBO Now, as did CBS and a myriad of others, but Netflix is still the leader in this category.
The first quarter is expected to be strong for Netflix, with Hargreaves expecting more than 4 million subscribers added, 1.8 million coming domestically.
"Meeting U.S. streaming expectations is the most important metric, in our view, as it would keep Netflix on track to add 4 million subscribers in 2015 and generate nearly $1.0 billion in domestic operating profit in 2016," Hargreaves wrote in the note.
Netflix ended the fourth quarter with 57.4 million subscribers, of which 54.5 million are paying subscribers. The company earned 72 cents a share on $1.48 billion in revenue for the quarter, compared to estimates of 45 cents a share and $1.485 billion in revenue.
However, there is some risk that the second quarter may be weak due to the competing launch of HBO Now and Season 5 of Game of Thrones. Despite that fact, Netflix's original content, including House of Cards and the upcoming Daredevil, could "offset" some weakness.
It's clear that Netflix is only getting stronger, with the company announcing that its users watched 10 billion hours in the first quarter. "We believe this reflects Netflix's structural advantage in purchasing content to match audiences, rather than audiences at specific times," Hargreaves said in the note.
As the company continues to expand around the globe, it's highly likely these numbers will continue to rise, allowing Netflix to spend even more on content. Netflix has said previously it expects to end its global expansion by 2016, a statement received warmly by investors.
"Belief in this advantage is likely at the core of Netflix's plan to expand to every country in 2016," Hargreaves wrote in the note." If the advantage proves to be durable, which we believe it will, Netflix is likely to exit 2016 to capture share of viewership and TV viewing dollars on a global scale."
Netflix is expected to report earnings on Wednesday, April 15, after market close.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
